What is a peer-to-peer loan?

A peer-to-peer loan is a loan granted by a private individual to another private individual. A peer is a person who is equal and belongs to the same group as another person. In contrast, there is a higher hierarchy gap between a private individual and a bank.

This type of money lending is also called person-to-person credit – a common abbreviation is P2P. If you borrow money from your brother or girlfriend, it is such a loan.

However, lenders and borrowers do not have to know each other. For example, there are platforms on the Internet that mediate between private individuals seeking or granting credit.

Reasons for a peer-to-peer loan

A peer-to-peer loan can have both advantages and disadvantages over other credit models.

advantages

If you take out a loan from a bank, additional costs may arise, such as processing fees. In addition, most banks are free companies that work economically and want to make a profit.

In the case of a peer-to-peer loan, this profit (if interest has been agreed) directly benefits another person. If the same person invested your money with a bank, you would in many cases receive a lower interest rate than with a personal loan to another person.

Some borrowers also hope for the human understanding of lenders – for example, when repayment is delayed or it is unclear when exactly the borrowed money can be repaid.

drawbacks

However, the desire for understanding and potential problems in collecting outstanding payments is a potential disadvantage for the lender. If you lend money to a person and a fixed repayment term has been agreed, you can claim the money back after the expiration of this period. A bank has an established procedure for this and usually works with lawyers who routinely deal with such cases. As a private person this means a lot of effort for you.

However, disadvantages are also possible for the recipient of a peer-to-peer loan. Many borrowers are ashamed of having to take out a loan. In the personal environment an imbalance can develop thereby and the guilt can load friendships and kinship relations. If you are the lender yourself, you may be reluctant to stubbornly reclaim any money due.

Dubious platforms on the Internet also pose a threat to peer-to-peer loans. Distinguishing between serious and dubious offers is often a challenge for inexperienced borrowers.

Family and Friends

The English term “Family and Friends” is also often used in German when you lend or receive money from a person you know personally. Money lending among friends and family is often regulated very informally. In many cases there is only one oral agreement, but it is also binding.

Interest is often not agreed on loans from relatives or friends if the amounts involved are small. The lender does not always have a profit motive, but wants to help a friend or relative out of a difficult situation. However, interest is not generally excluded, especially in the case of higher nominal values.

Online marketplace for peer-to-peer loans

There are various platforms on the Internet where potential lenders and borrowers can find each other for a peer-to-peer loan. A borrower can have one or more lenders at the same time.

Some of the loans on these platforms are granted in of an auction. Either the borrower applies to a potential lender or vice versa. Mixed forms are also possible.

Online peer-to-peer credit marketplaces aim to bring together people who have similar ideas about the terms of a loan. The reason for the loan can also play a role for the lender. An example of this is micro-credit to small businesses or initiatives.